Floods have devastated Beijing this month, leaving vast sections of the city submerged or destroyed, and focusing scrutiny on the city's already over-serviced and antiquated sewage systems. In these times of natural disaster, Beijing could have done with Yu the Great, a legendary flood-controlling leader and founder of the Xia Dynasty.
Instead it had to make do with Ji Lin, vice mayor of Beijing, whose announcement that citizens who abandoned their cars to escape the flood would be exempt from the usual fines was hardly any consolation. We here at OATS send out our deepest sympathies to those involved in or affected by the torrents, including our own Diana Shen.
The environment, both wild and tame, was a key issue this month, as the State Council revealed its latest 5-year environmental protection plan and announced its target of producing and selling five million energy-efficient and alternative-energy vehicles by 2020. The former will focus on easing administrative regulations and improving domestically-manufactured technology, optimising the sluggish environmental industry. The latter aims to have 500,000 EVs and hybrids on China's streets by 2015 – a figure it plans to increase tenfold to 5 million in 2020.
While not without good intentions, the plan is woefully optimistic. China's EV sales have consistently underperformed, despite generous subsidies – in some cases up to $2,000 – to encourage purchases of more eco-friendly transport. In 2011, only 5,579 EVs were sold, with a further 3,444 EVs sold in the first six months of 2012. In 2010, Toyota sold just one Prius, a hybrid model which has seen blistering sales growth in the U.S., while Warren Buffet-back electric carmaker BYD forecast first-half profits for 2012 would drop as much as 95% as China remains slow in adopting EVs.
If the government is to realise its 1115% increase in EV sales by 2020, it will also need to improve the nation's energy infrastructure, as most major cities only contain a small number of recharging stations. Ultimately, the fate of EVs in China will depend on consumers, who may be slow to trade their BMWs for BYDs.
Regardless of whether or not EV sales reach these targets, major oil companies are continuing to invest in cleaner and more eco-friendly oils. Sinopec is currently building three major Group II and Group III facilities with a cumulative output of 576,000 tonnes per year (t/y) across China to help meet growing demand, as part of the state-owned giant's plan to more than double its Group II/III output to 1 million tonnes per year by 2015.
At the recent ICIS Asian Base Oils & Lubricants Conference in Singapore, a manager from Sinopec Lubricants Co predicted Chinese lubricants consumption will reach 8.1 million t/y by 2015, of which 3.65 million tons will be engine oil. Group II/III base oils look set to outpace Group I production, as CNOOC, CNPC and Sinopec gear up their facilities to produce higher quality lubricants.
The majors have also been shoring up reserves as the government moves into the second phase of its plan to increase strategic petroleum reserves and reduce its exposure to market fluctuations. After two years of delays, Sinochem Corp will now begin extending its Aoshan storage facility in Eastern China. The upgrade will increase capacity to 50 million barrels, and is part of a country-wide expansion to bulk up storage to 270 million barrels from 100 million barrels.
China is becoming increasingly dependent on foreign oil. The International Energy Agency recently predicted that the country's reliance on foreign crude would to surge to 80% from its current rate of around 50% by 2030. The new storage projects are a step in the right direction, however, the a 50 million barrel facility is scarcely enough to cover 10 days of imports and the energy-hungry nation is still way behind the OECD standard of stockpiling enough oil to cover 90 days of imports.
As the U.S. eases its dependency on Arab oil, China is rushing in to fill its reserves while it can. Moreover, despite a recent report showing a slowdown in unconventional energy purchases, recent talks to invest $12.5 billion in an Ecuadorian refinery reflects the government's anxious determination to secure its future energy by acquiring overseas projects.
CNOOC have also made a record-breaking offer to buy Canada's Nexen Inc for a staggering $15.1 billion, the biggest foreign acquisition every by a Chinese company. The bold move reinforces just how desperate the Chinese are to secure their energy future at any cost. Could a strapped-for-cash European government be tempted to part with their national oil co if the price was right? In such times of austerity, it could well happen...
As always, OATS is working closely with a range of OEMs and oil producers to ensure they are working with the very latest possible data to inform their strategies. To find out more, or, if you would like to comment on anything you have read in this Bulletin, simply contact Diana at DShen@oats.co.uk.
Sebastian Crawshaw
Chairman, OATS